What young Australians should know about the Greens' housing policy

Around a third of Australians rent. Some of these are permanent renters, but others are homeowners-in-waiting.

In either case, there should be no enmity between renters and owners. But policies that handicap investors who rent, also handicap people who will be first-home buyers because it limits their renting options while they save a deposit.

How does negative gearing work?

The principle of negative gearing is that if you are going to tax investment income, an investor must be able to deduct their expenses from their income.

If the investor owns a property in their own name, then that income includes what they earn from other sources, like their principal job.

Most plans to abolish negative gearing tacitly admit this. They may prevent investors from deducting expenses against their other income, but they still allow them to carry forward their losses until the property becomes cash flow positive.

This means that if the Greens were to abolish negative gearing, they don't somehow save the whole of the deduction and bank it to government coffers. They save it, until they have to give it back in the future as deductions against future income.

In accounting jargon, the tax amounts to the interest value of the timing difference.

What they save is the interest they earn on the money that would have stayed with the taxpayer, if it had been allowed as a tax deduction.

This means the value to the government is much less than most of the models that are used to justify the policy, which magically assumes the government gets the benefit of the foregone deduction forever.

But it gets worse than that.

We are in a situation where we need drastically more properties than we have now, which means we need to encourage people to build more houses.

Negative gearing makes that possible.